Welcome to OW's Tariff Tearsheet, a twice weekly update that compiles the most insightful links and content, externally as well as that developed by Oliver Wyman

Today’s Tearsheet includes five highlighted insights from Oliver Wyman analysis, Apollo (Torsten Slok, Chief Economist), and Sinocism (Bill Bishop) focused on (1) the importance of the automotive sector in US trade negotiations, (2) the nosedive in China-US trade, (3) the cryptic tango of negotiations with China (“are they talking or not?”), and (4) the adverse responses of US consumers and firms to tariffs

Autos Play a Key Role in US Trade
Oliver Wyman Analysis, Apollo – 28th April 2025

Central Role in Trade Agreements: Cars and car parts are pivotal in trade negotiations due to their significant economic impact and complex supply chains. As major contributors to GDP and employment, automotive industries influence bilateral and multilateral trade discussions

Key Considerations in Negotiations:

Tariff Implications: The automotive sector often faces high tariffs, making it a focal point in negotiations. Reducing or eliminating these tariffs can lead to substantial cost savings and increased competitiveness for manufacturers and exporters

Supply Chain Dependencies: The production of cars involves intricate supply chains that span multiple countries. Negotiations often address the seamless movement of parts and components across borders, aiming to reduce delays and costs associated with customs and regulatory compliance.

Environmental Standards: With increasing emphasis on sustainability, trade agreements frequently include discussions on environmental standards and regulations for automotive products. Aligning these standards can facilitate smoother trade relations and promote green technologies.

Technological Advancements: Innovations in electric vehicles (EVs) and autonomous driving technology are reshaping the automotive landscape. Trade negotiations may focus on intellectual property rights, research collaborations, and technology transfers to support the growth of these sectors.

Influence of Key Automotive Nations

Mexico: As a major hub for car manufacturing, Mexico plays a crucial role in North American trade agreements, leveraging its production capabilities and proximity to the US market

Japan and South Korea: Renowned for their automotive brands, these countries are vital players in trade discussions, often seeking favorable terms for exports while addressing import regulations and standards

Germany: Europe's automotive powerhouse, Germany's influence in trade negotiations is significant, particularly in the EU context, where it advocates for policies that support its expansive car industry

United Kingdom: Post-Brexit, the UK is actively negotiating trade deals with key partners, aiming to secure advantageous terms for its automotive sector amidst shifting regulatory landscapes

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Trade Between China and the US Collapsing
Torsten Slok, Apollo, 25th April 2025)

Declining Container Traffic: Daily container traffic from China to the US is sharply declining

Impending Shortages: This will likely lead to empty shelves in US stores within weeks, resembling Covid-era shortages for consumers and firms reliant on Chinese intermediate goods

Inflation Concerns: We will soon begin to see higher inflation because there are a significant number of product categories where China is the main provider of certain goods into the US market

Job Impact: May will see substantial layoffs in trucking, logistics, and retail sectors, notably affecting small businesses like independent toy, hardware, and men's clothing stores. With 9 million trucking-related jobs and 16 million retail workers, the economic risks are considerable

Countainer Ship Count - Departures from China to the United States

Countainer Ship Tonnage - Departures from China to the United States

Chinese April Politburo meeting; Trade "struggle"; PRC tariff exemptions; Confusing talk of talks
Sinocism, 25th April 2025

The Chinese Politburo held its April meeting on Friday, with the evolving tariff and economic situation at the forefront

Trade Talks Ambiguity: Mixed messages continue about U.S.-China trade talks. President Trump mentioned ongoing meetings, yet China's Ministry of Foreign Affairs denied any consultations. Despite official denials, there were sightings of Chinese officials at the U.S. Treasury, hinting at possible undisclosed discussions

Economic Concerns: The Politburo acknowledged increasing external pressures affecting China's economy but did not announce any new stimulus measures. Instead, they confirmed plans to ease monetary policy and accelerate fiscal initiatives without exceeding the deficit spending approved in March. They are prepared with reserve policy tools to counter U.S. tariffs, indicating readiness for further trade tensions

Tariff Exemptions: Reports suggest China is waiving certain retaliatory tariffs on U.S. imports, including some semiconductor products, while maintaining tariffs on others like memory chips. Refunds are being offered for tariffs paid on exempted items within a specific timeframe. Discussions are ongoing about suspending tariffs on other U.S. imports, such as medical equipment and industrial chemicals, due to economic pressures

International Perception: The nuanced language used in communications underscores China's focus on managing both domestic and international perceptions during ongoing trade tensions.

How Are US Consumers and Firms Responding to Tariffs?
Torsten Slok, Rajvi Shah, and Shruti Galwankar, Apollo, 25th April 2025

How are firms responding to tariffs?

Decline in New Orders: Firms are experiencing a noticeable drop in new orders as tariffs disrupt established supply chains and increase costs. The uncertainty surrounding international trade policies has led businesses to adopt a cautious approach, impacting demand for goods and services

Reduction in Capital Expenditure Plans: Many companies are scaling back their capital expenditure (Capex) plans due to the financial strain imposed by tariffs. The increased costs and unpredictability of trade relations discourage investments in new projects, expansions, or technology upgrades, potentially stalling growth and innovation

Inventory Adjustments: Prior to the implementation of tariffs, firms were increasing their inventories in anticipation of trade disruptions. This stockpiling was a strategic move to mitigate potential shortages and price hikes. However, with tariffs now in effect, companies may face challenges in managing these inventories efficiently, considering fluctuating demand and the need to adapt to changing market conditions

Downward Revision of Earnings Expectations: As tariffs impact operational costs and market dynamics, firms are revising their earnings expectations downward. The added expenses from tariffs, combined with potential decreases in sales and profit margins, require businesses to adjust their financial forecasts. This revision reflects the anticipated impact on revenues and profitability, affecting investor confidence and stock valuations

The Voluntary Trade Reset Recession

S&P 500 firms with higher less lower 12M EPS revisions as a share of total revisions

How are consumers responding to tariffs?

Record-Low Consumer Confidence: Tariffs have driven consumer confidence to record-low levels due to concerns about rising prices and economic uncertainty. This wariness affects spending behaviors as consumers fear their purchasing power may diminish

Front-Loading Purchases: Many consumers accelerated purchases of goods, particularly electronics and appliances, before tariffs took effect to avoid anticipated price hikes. While this boosted sales temporarily, it may lead to reduced spending in the coming months

Slowing Tourism: The tourism sector is experiencing a decline, especially in international travel, as tariffs increase travel-related expenses like airfare and accommodations. Economic uncertainty and reduced discretionary income further discourage travel plans.

Consumer sentiment across income groups

United States International Arrivals

Welcome to RiskbOWl – the first closed community of Risk professionals to share ideas and best practices

Through RiskbOWl, you will be able to anonymously ask questions, share perspectives, run targeted polls, discuss recent regulatory developments and so much more.

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Conversations with our clients reveal the imperative of realizing the benefits from the promise of digitally transforming credit decisioning and lending journeys, driven by the need to control bank costs and retain customer loyalty in the face of competition from more nimble, digitally-native banks

To better understand current trajectories in the lending transformation space, Oliver Wyman conducted a survey of banks across several markets, looking at the overarching burning platform, budgets, barriers to transformation, data, analytics, underlying technology, customer management, and organisational setup. In summary, our high-level, selected findings indicate

Lending transformation is a high priority topic, with participants sequencing Retail and SME first in their lending transformation programs Respondents see the traditional incumbent breakthrough as the biggest competitive threat over the new fintech challenger looming on the horizon Decisioning time, revenue growth and cost reduction cited as top 3 benefits, whilst expected uplift is highest for customer experience Budget for lending allocation is approached on program level or on individual level, with very few respondents approaching it as a strategic objective Most budget is spent on customer journeys, internal workflows and underlying IT infrastructure rather than analytics capabilities

Lending transformation survey infographic.png

Reach out for more insight, but we’d be keen to hear from the RiskbOWl community how this stacks up against your lending transformation program – post your thoughts below !

Welcome back to Risky Business, in which you take through some of the headlines impacting the banking industry. Read on as we take stock of the Q1 reporting and the broad outlook from some banks over the course of reporting season; a quick overview of the FCA's and PRA's strategic priorities with publication of their respective business plans; and find out how the Bank of England is attempting to take a more unified stress testing framework following the launch of its well-received system-wide exploratory scenario exercise last year

Q1 Earning calls roundup - As Good as it Gets?

Given the tumultuous opening to 2025, earnings calls updates are being closely scrutinized to discern the impacts from the monumental shifts underway in the longstanding international, open market, free trade-based order. As we approach the end of reporting season, a pervading sense of caution from the economic uncertainty looks set to overshadow broadly positive performance over the quarter. Analysts questioning moreover in the main attempt to glean from bank executives what could possibly be on the horizon from the market turmoil, such as JPMorgan CEO Jamie Dimon forecasting economic turbulence, and the bank reinforcing this caution with increasing provisions for loan losses from $3bn, up from $1.9bn over the quarter.

In another sign of the uncertain outlook, Deutsche Bank raised provisions to €471 million, 16% higher than anticipated, and signalled their preparedness for potential impacts of US tariffs on vulnerable clients by raising provisions by ~€100 million. Deutsche Bank's CFO, James von Moltke, cautioned that while he expected provisions for credit losses to remain within the guided range of €350 million to €400 million per quarter, tariff developments and broader geopolitical risks could cause swings in the €100 million figure. Also increasing provisions were HSBC, reporting expected credit losses by $202 million to $876 million in Q1, projecting a "low single-digit percentage" impact on revenues and an additional $500 million in incremental bad loan provisions in a scenario with "significantly higher tariffs".

With results largely positive for most banks reporting thus far, this could arguably be the best earnings banks may see this year, which given the uncertainty amidst the broader reconfiguring in trade, and geopolitical tensions, could be less positive in the coming months.

FCA and PRA Business Plans for 2025/ 26 published

As is customary for the end of the financial year, the Financial Conduct Authority (FCA) and Prudential Regulatory Authority (PRA) have published their respective strategic and business plans, summarised below

FCA annual work programme 2025/26
The FCA's annual work programme for 2025/26 emphasizes becoming a smarter regulator by enhancing efficiency in data collection and digitizing processes. Initiatives such as the rollout of My FCA for unified access and "flexi collections" in RegData streamline submissions. These improvements aim to reduce the regulatory burden and expedite the authorisation process for quicker application assessments

Supporting growth entails boosting the UK's financial sector through competitive and innovative initiatives like reforming capital requirements and collaborating on AI advancement barriers. Efforts to simplify conduct requirements in commercial insurance and pension reforms are integral. Open banking initiatives and streamlined data processes further enhance market competitiveness

Helping consumers navigate their financial lives focuses on improving consumer resilience with regulated credit products like Buy Now Pay Later. The FCA is refining rules to ensure prudent use and encouraging industry innovation for consumer protection against financial shocks. Collaborative stakeholder efforts aim to develop policy frameworks that reinforce consumer financial stability

Fighting financial crime aims to reduce payment fraud and enhance market integrity by developing a data-driven detection system. The FCA facilitates cross-organizational data sharing to disrupt financial crime efficiently and narrow down exploitation gaps. Continual framework modernization seeks to safeguard investments and uphold consumer interests

PRA Business Plan, 2025/26

Here's a high-level summary of the PRA's section on Banking, in its Business Plan for 2025/26:

Implementing the Basel 3.1 Standards
The PRA is working to finalize policy and rules for the Basel 3.1 standards that are yet to be implemented in the UK. Near-final rules were published in 2024, addressing competitiveness and growth alongside international standards[1]. Significant adjustments were made to lower capital requirements to support lending to SMEs and infrastructure projects, without increasing overall capital requirements[1]. The implementation date has been delayed to January 2027 to align with US plans, ensuring a full rollout by 2030[1].

Bank Stress Testing
Stress testing remains a crucial tool for the PRA to evaluate the resilience of individual banks and the overall banking system against hypothetical adverse scenarios. The PRA and the Bank of England conduct these stress tests to fulfill both microprudential and macroprudential objectives, employing methods such as full-fledged Bank Capital Stress Tests[1]. In 2025, a Bank Capital Stress Test will be carried out, focusing on systemic UK banks to assess risks related to economic cycles. This will inform the setting of capital buffers needed to fortify the banking system

Securitisation
In an effort to streamline the banking rules, many components of the UK Securitisation Regulation were transferred to the FCA and PRA rulebooks. The PRA plans a consultation in the latter half of 2025 aimed at enhancing the securitisation framework. This includes amending the securitisation standardised approach and adjusting capital treatments for residential mortgages, enhancing the scalability of financial markets.

Internal Ratings-Based (IRB) Models & Model Risk, Liquidity, and Credit Risk Management
Over the past decade, banks have become increasingly reliant on models and scenario analyses for future risk assessment[1]. The PRA continues to work with financial institutions under the IRB approach, refining models and promoting the adoption of hybrid strategies for mortgage modelling[1]. The focus in 2025/26 will remain on implementing SS1/23, encouraging banks to improve model risk management as an essential risk discipline. The PRA will ensure compliance with liquidity and funding standards, particularly following the liquidity crises of March 2023[1].

Future of Payments
The PRA contributes to innovation in money and payments by monitoring advancements in deposits and stablecoins[1]. In 2025/26, the PRA aims to implement the BCBS standard on banks' cryptoasset exposures[1]. Engagement with international bodies will continue to assess digital money and cryptoasset market developments

Future Banking Data (FBD)
The Future Banking Data project integrates the Banking Data Review and Transforming Data Collection efforts to simplify banking regulatory reporting[1]. The initiative focuses on cost reduction and improving data relevance, quality, and timeliness, enhancing regulatory efficiency

Bank of England joins the stress testing dots
Risk Magazine, 29th April

The Bank of England (BoE) is advancing its stress-testing framework by integrating system-wide stress tests with traditional firm-level assessments. This initiative aims to achieve a comprehensive understanding of risks and the interconnectedness within the financial system, acting as a unified regulatory approach. Following the successful completion of the BoE's first system-wide exploratory scenario stress-testing exercise, which garnered positive feedback from both industry participants and regulators, the initiative seeks to connect system-wide assessments with specific sector tests concerning banks, insurers, and clearing houses, as stated by senior BoE official Nathanaël Benjamin.

Traditionally, the BoE has employed sector-specific stress tests, focusing on how bank segments respond to adverse conditions such as credit losses and liquidity pressures. With the creation of sectoral and system-wide frameworks, efforts are now directed at ensuring these approaches inform and enhance each other. Benjamin highlighted the disconnect between system-wide exploratory scenarios and traditional stress testing systems. In particular, traditional tests evaluate the resilience of individual institutions, whereas exploratory scenarios assess overall market stability, irrespective of individual player failures.

For future preparedness, the BoE plans to continue investing in system-wide stress evaluations to monitor emerging vulnerabilities within less understood areas of finance. Such proactive strategies are intended to uncover overlooked risks. Benjamin emphasized that these stress testing exercises serve as crucial tools for illustrating potential scenarios and preparing market participants for future challenges. By sharing insights gained from these tests with the public and institutions alike, the BoE aims to enhance overall market preparation and readiness.

Moreover, the European Central Bank (ECB) is expanding its system-wide stress models to include central counterparties (CCPs), reflecting a broader regulatory trend aiming to fortify stress testing frameworks by covering a wider range of financial institutions. The ECB's move aligns with increasing recognition of the interconnectedness in the financial systems, necessitating comprehensive assessments that take systemic risks into account. This initiative is part of an endeavor to improve financial system robustness against external shocks.

In summary, the integration of system-wide and individual stress testing frameworks by both the BoE and ECB signifies a progression in regulatory practices focusing on financial stability. Collaboration between varied testing frameworks hopes to yield a more resilient financial system capable of withstanding economic shocks. Transparency and information sharing will be crucial in ensuring preparedness among market participants as both institutions pursue these regulatory strategies. This endeavor reflects a commitment to proactive measures against potential financial sector vulnerabilities.

A noteworthy oddity potentially affecting the choice of modelling approach: In the slotting approach, the risk mitigating effect of ECA coverage cannot be recognised. I.e. for transactions with ECA coverage, there is a significant over-estimation of risk in the slotting approach. On the other hand, FIRB and AIRB as well as the standardized approach do allow for consideration of ECA coverage.

After a decade of negative or zero interest rates, European economies entered a rising rate cycle in 2022. Now, as markets anticipate the beginning of an easing cycle, deposit betas are expected to catch up. The question is, are banks prepared to compete for deposits in this environment, which is unfamiliar to a whole generation of bankers?

In 2024, a systematic approach to deposit management is not only a critical value driver but also a necessary defensive tool. By leveraging smart deposit management techniques, anchored on advanced analytics and operational capabilities, banks can optimise their deposit costs significantly.

What actions have you taken? Where can the community help you?

I would also like to learn more about this

@OP

In my experience, it typically depends on the bank's approach to the override:

Pre-calibration would typically be included if they are trying to include is as an statistical predictor of risk: i.e. you have some historical information that help you calibrate the specific weight and you only include the override if it increases the predictive ability of the model

Post-calibration if they want it to be a “penalization” mechanism for management (however this will not be fully compliant with EBA calibration guidelines for the use of overrides in IRB models)

In the context of the 2025 EBA Stress Testing exercise we’ve convened our sixth EBA Stress Test industry roundtable, involving representatives from 25 of the largest European banking institutions across ten countries.

While each bank is looking to approach the stress testing exercise from its own unique perspective, we’ve found that two common trends seemed to emerge:

Banks expect the anticipated depletion of the Common Equity Tier 1 (CET1) ratio under adverse scenarios to align closely with the outcomes seen in 2023.

Banks see the operational complexity of the exercise as their main challenge. Participants were concerned about potential CRR3 re-statements (particularly the difficulty in accurately projecting a CRR3 Fully Loaded framework that incorporates all CRR3 phase-ins expected by 2032) as well as the need for top-down calculations to estimate CRR3 compliant RWAs, which could complicate reconciliation efforts and impact result accuracy.

Other concerns raised by participants included the new timeline and significant changes to Quality Assurance processes - especially regarding potential on-site visits and inspections by the European Central Bank (ECB) - and the unpredictability of the new Net Interest Income (NII) platform and Quality Assurance machinery, which banks believe leaves them with less control over projections and adds to the uncertainty of the exercise.

Overall, it was insightful to see how given the inherent complexity of the exercise participants agreed on the need for thorough upfront preparation and a robust end-to-end stress testing infrastructure as conditions to success. What are the main concerns at your organisation? How do you feel your competitors will react to EBA’s requirements for this year’s stress testing?

Graphics: How Oliver Wyman supports Financial Institutions carry out stress testing:
cc0303ff-d517-49f9-b22c-e6d2071f1964-image.png

Lots of good answers here.

One tough learning from implementing this at scale is that unlike traditional ML, automated tests can only capture a small fraction of what can go wrong with GenAI. While the automated validation is necessary, it is not sufficient.

We have typically needed to also develop large manual testing protocols for releases, where humans (either developers or a set of test users), attempts a mixed of predefined and new prompts, and judge the quality of the answers. Often we will uncover “issues” that are very subjective, such as the answers technically being correct but pulling from different files that we wished, or answers being less/more detailed than the average user prefers, or an entirely new file format having issues (hence not covered by tests yet), or a million other things!

For one of our recent clients, we ran “hackathons” along with releases where both new and power users would try various prompts and score the output. It was incredibly helpful to identify things the tests had failed to see

Hi RisbOWl community.

I have been thinking lately about the dynamics of the working relationship with 2nd and 3 LOD from a 1LoD perspective.

While there is much talk about these dynamics from a high-level, ERM or governance perspective, those of us who are in involved more on the day to day interactions need to make sure we 'walk the talk'.

While clear, continued communication is key, I have found the use of shared resources (such as evidence repositories, plans, collaborative query logs, etc) have really made a difference in the relationship we have built with our validators in the second line of defence.

What does the community think about common techniques for increasing cross-line of defence productivity.

Thank you in advance.

Very good questions. I’ve come across this as well on operational resilience and
cyber, where the challenges are similar

Some thoughts on this (also with the ex-regulator hat on):

Management bodies should acknowledge the challenge and be thoughtful around
how to address this, e.g. through training; reporting; succession planning
etc. We recently heard from a regulator that they were worried that sometimes
these topics are ‘outsourced’ to one person on the exec/ Board who
understands it, whereas they are looking for broader skills and knowledge in
the group. Again I think this is important to acknowledge, including the fact
that building those muscles take time In terms of ‘evidencing’ appropriate oversight and challenge by the Board,
when supervisors look at meeting minutes they would expect to see critical
questions being asked and a level of discussion (rather than the Board just
‘noting’ things) The quality of the materials and reports being presented to the Board is very
important, both data, but also someone bringing out the ‘so what’ and in
particular where there are areas of judgement and uncertainty, and where
there are trade-offs